Stocks Hit New Highs on Data, M&A

Investors bought on jobs, manufacturing, and consumer confidence numbers, though inflation concerns linger

Stock markets hit new historic highs on Friday, driven by a flurry of encouraging economic data that showed signs of a solid economic rebound in the second half of the year. Gains by leading retailer Wal-Mart pushed the Dow Jones industrial average to a new record high while further M&A activity and positive earnings reports helped the broader S&P 500 Index set a new record for a third consecutive day.

A jump in nonfarm jobs of 157,000 in May got trading off to a strong start. The Labor Dept. numbers were markedly stronger than a consensus forecast of 140,000, while the unemployment rate held at 4.5%, as expected. The service sector, by adding 176,000 new jobs in May, continued to drive employment gains, more than offsetting a loss of 19,000 manufacturing jobs and no change in construction jobs after a 21,000 drop in April.

Personal income fell 0.1% in April, while spending was up 0.5%. The stronger-than-expected data support the view that the economy is rebounding in the second quarter, according to Standard & Poor's.

The Institute for Supply Management's manufacturing index also beat expectations, inching up to 55.0 in May from 54.7 in April. Although thamarket had been looking for a drop to 54, the May number was somewhat disappointing after the strong Chicago survey reported Thursday, Standard & Poor's said.

The University of Michigan's Consumer Sentiment Index climbed to 88.3 in May, from 87.1 in April, but was weaker than a preliminary report of 88.7 earlier in May.

On Friday, the Dow Jones industrial average finished 0.3%, or 40.47 points, higher at 13,668.11. The broader S&P 500 index, ended up 0.37%, or 5.72 points, at 1,536.34, a new record high but still 17 points shy of an intraday high of 1,552.87 on Thursday.

The tech-heavy Nasdaq Composite index moved up 9.4 points, or 0.36%, to 2,613.92.

In the energy markets, July crude oil futures on the NYMEX ended $1.07 higher at $65.08 a barrel.

"To some extent, the new [stock market] highs are overdue," says Brian Gendreau, an investment strategist at ING Investmernt Management in New York. "We've got some wonderful backdrop for the equity market performance. It's a picture of modest growth with moderating inflation."

That suggests that economic growth is occurring just as the Federal Reserve wants it to, indicating that, at a minimum, interest rates are on hold for the time being and might even be reduced a notch in a few months' time, he added.

But other observors see the debate clearly shifting with this week's positive economic numbers from talk of a rate cut to speculation about if and when the Fed will resume raising rates, according to CNBC Business News.

Although there was barely a hint of inflation in the mildly higher average hourly wage and slightly lower personal income levels, rising oil and gasoline prices are stirring concern over hideen inflationary pressures that could prompt the Fed to tighten rates. But higher energy prices are much less of a negative catalyst for the economy in the current service-oriented economy than they were 20 years ago when energy was a bigger percentage of the Gross Domestic Product, says Art Hogan, chief market analyst at Jefferies & Co. Consumers have also learned to take the large swings in prices in stride, he added.

"Three months ago, we would have been alarmist about a $3.25 gallon of gas and $65.05 barrel of oil, but now we've gotten used to it," Hogan said. "The threshold of pain has risen, enough so that it's not a headline story right now."

Interestingly, there has been less appreciation in energy sector prices to match increases in commodity prices, which may be a way the economy is predicting that commodity prices are going to come down, Hogan said.

Ongoing consolidatioin across all industry sectors, most pronounced among software manufacturers, is anothger reason he remains optimistic about the stock market gains.

Investors will be scrutinizing a new raft of economic data next week, most importantly the U.S. trade deficit in goods and services on Friday, June 8. Economists are expecting the trade gap to have slimmed slightly to $62 billion in April from a $63.9 billion deficit in February, according to Action Economics. The ISM service sector index, due out on Wednesday, June 6, is forecast a touch lower for May after solid gains in April. Productivity growth and unit labor costs are also due out on June 6, with productivity growth for the first quarter likely to be revised down and unit labor costs expected to be revised higher.

Among stocks moving on Friday, Wal-Mart Stores (WMT) traded 3.9% higher at $49.47 after approving a $15 billion share buyback and promising to cut spending by $1.5 billion to $15.5 billion this year. The retail giant also plans to scale back expansion of its supercenters in an efort to bolster future same-store sales comparative gains.

J. Crew Group (JCG) reported earnings of 39 cents per share in the first quarter, vs. 12 cents a year ago. Same-store sales were up 8% and total revenue was 24% higher. Shares ended up 11.6% at $50.08.

Re-ignited hopes of a News Corp. (NWS) buyout of Dow Jones (DJ) sent Dow Jones shares soaring 14.8% to $61.20 after the Bancroft family, which controls the company, said it would meet with Rupert Murdoch about News Corp.'s bid for the Wall Street Journal parent. The family indicated willingness to sell, saying the "mission of Dow Jones may be better accomplished in combination or collaboration with another organization, which may include News Corp."

Dell Inc. (DELL) closed up 1.5% after posting better-than-expected earnings of 34 cents per share on revenues of $14.6 billion, versus 33 cents per share a year ago. The market forecast had been 26 cents per share. The computer manufacturer said it will cut 8,800 jobs, or 10% of its workforce.

Two executives at CKX Inc. (CKXE) have offered to buy all outstanding shares in the company for $13.75 each. Shares of the company that controls the use of images of Elvis and owns the rights to TV's top show, "American Idol," leaped 37.8% to $14.65.

CRA International (CRAI) projected second-quarter earnings of $6.7 million, or 53 cents per share on $88 million in revenue, below a Wall Street forecast of 64 cents per share. The management consulting firm's litigation-related revenues have been hurt by the settlement of certain large litigation cases, a slowdown in others and the delayed start of new suits. Shares were ended 14.2% lower at $45.38.

European stock markets continued to move higher on Friday. In London, the FTSE 100 index was up 1.00% to 6,676.70. Germany's DAX index climbed 1.33% to 7,987.85. In Paris, the CAC 40 index moved 1.05% higher to 6,168.15.

Asian markets mostly lower. In Japan, the Nikkei index was up 0.47% to 17,958.88. In Hong Kong, the Hang Seng Index was off 0.15% to 20,602.87. China's Shanghai Composite index fell 2.65% to 4,000.74.

Treasury Market

Treasury prices were down on Friday. The ten-year Treasury notes were off 14/32 to 96-16.5/32 for a yield of 4.95%; the two-year note was down at 99-26/32 for a yield of 4.97%; and 30-year bonds were off 20/32 at 95-11/32 for a yield of 5.05%.

Standard & Poor's sees Treasury yields climbing amid signs of strength in the economy with inflation, with the 10-year notes hovering around 4.95%, the highest level in nine and a half months. Breaching the 5.0% level could trigger some money transfers from stocks into fixed-income products, especially those that guarantee a 5.0% yield, CNBC Business News said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE